Quora Answer: How Long Should a Founder Remain CEO?

The following is my answer to a Quora question: “How long should a founder remain CEO?” 

There is no answer that applies to every founder.  There are two kinds of founders.  Most of them are people with a singular idea, and build a company around that idea to raise funds to scale it.  The second type is like the first, except for the fact that he has management experience.  It is the second type of founder who would make an effective chief executive.  The first kind has to learn on the job. 

When a startup is pitching for funding, the founders have to take those roles regardless, because there is no budget for a professional executive team anyway.  There are times when an investor would stipulate that as part of the finding package, they would have a preferred candidate as chief executive or put it in the contract that the startup hire a professional.  This normally happens in the later funding stages.  The founders may be experts in the operations aspect of the business, but they still need an experienced hand in managing the growing team.  This chief executive reports to the board, in any case, meaning he still reports to the founders. 

Regardless of experience, it is generally advisable that founders eventually relinquish day to day management of the business to a professional c-suite, and stay at board level.  Their role is to grow the business, and be part of the conversation that shapes the strategic direction of the business.  If they are successful in getting sufficient funding to scale, they need to focus on this, and they cannot do this if they are managing the daily operations of the business.

Wealth Preservation for Wealth Creators

As a financial consultant, many of my clients are business owners, entrepreneurs, accredited investors.  They are in the business of wealth creation.  They take calculated risks, they have a high risk tolerance, and they are prepared for major losses in the course of their business.  But when in comes to their own personal portfolios, the opposite should be true.  I recommend they buy a lot of insurance to mitigate their risk exposure, and the emphasise long-term investments, with balanced risk profiles.  There is a reason for this. 

In the course of their work, running their companies, the market can change, and they could lose it all.  The company could fail.  There could be problems with the supply chains.  Perhaps some leverage did not pay off.  The failures of the business should not mean they are themselves wiped out.  Because of this, when it comes to their personal portfolios, the emphasis is on stability.  This is the balance between wealth creation and wealth preservation. 

In general, creating wealth requires owning a business.  A professional could earn comfortably, but unless he owns the business, there is a ceiling to how much he can earn.  No matter how much he earns, he eventually realises that they will pay him enough to stay, but he will never earn enough to leave.  He is rich because of his professional skills, but the owner of the business, who pays his salary – he is wealthy. 

Being wealthy requires owning that business, and part of that is managing risks.  Because these people are business owners, it means that much of their assets and earning capacity is concentrated in one single entity.  This focuses their assets and concentrates it in a manner that allows him to leverage it to generate revenue.  However, just as it increases his chances of success, it also concentrates the risk.  They either win big, or lose their home.  This requires a high tolerance for risk in this capacity.  This also means they are fully concentrated on the business; it is their life. 

To balance this out, they need accountants, lawyers, auditors, tax consultants, and most important of all, financial consultants to manage their personal assets, so they can keep most of their wealth.  A financial consultant, in this capacity, creates a strategy that is the opposite of what the entrepreneur uses to create wealth, since the mandate is not wealth creation, but wealth preservation. 

The first thing we do is acquire an intimate understanding of assets and wealth to be preserved, and the risk exposure.  The most obvious is the concentration of it in one vehicle – the company.  That means the client’s personal investments need to be diversified.  Diversification is the most basic strategy to mitigate currency exposure, political risk, and the market cycle. 

The next step is to lower personal leverage, and mitigate tax exposure through investment vehicles, such as trusts.  This also affects asset allocation.  In some cases, as much as 40% is put into debt instruments such as Treasury bonds, and rated bonds.  Much of the remainder is allocated to mutual funds and indices.  This keeps it relatively liquid, while also providing a return that exceeds long-term inflation.  The market is volatile in the short-term.  Over an extended investment horizon, however, it is predictable, and trends upwards.  A lower, safer return, over an extended period, makes use of the power of compounding to provide an impressive return.  Done properly, the returns will more than double in a decade. 

Eventually, every business owner will seek an exit.  They might sell the business, they might hand it over to their successors, they may take it public.  If and when it comes to that, then the strategy adjusts again.  Because now, they need wealth creation as well as wealth preservation, unless they decide they have enough, or choose to retire.  Wealth management, whether for preservation or creation, is a science, not a lottery.  It is meant to be disciplined because we need to mitigate the chaos of fortune.  Fortune falls both ways.

The Grey Market: Birthing Unicorns

Conventionally, a grey market is an unofficial market for financial securities.  Grey market trading occurs when a stock that has been suspended from trades off the market, or when new securities are bought and sold before official trading begins.  The gray market is an unofficial one but is not illegal.  The term “grey market” also refers to the import and sale of goods by unauthorised dealers; in this instance as well, such activity is unofficial but not illegal. 

From the grey market, we have the derived concept of the grey space.  The grey space is the area of opportunity where an investor identifies a need before it becomes apparent, or where a founder creates a market where there was none, to address that need.  This is a relatively new definition, in entrepreneurship circles.  Identifying and exploiting this grey space is where opportunities are found.  This allows us to seize market leadership without the initial constraints of competition. 

These grey markets are opportunities for entrepreneurial growth.  An example is Spotify, the music streaming service.  It was founded on the 23^rd April 2006, in Stockholm, Sweden.  To date, it has revenue well in excess of US$9 billion, and a net income of US$650 million.  It all began with Napster, a peer to peer streaming service.  People used Napster to share files, but it was a pioneer company which never learned to balance its stakeholders.  Recording companies eventually sued it into bankruptcy, but the people was already appraised to a space where they could consume the music they wanted, tailored to their taste.  Apple stepped into the void and created iTunes.  It took almost a decade for Spotify to step into that space, and license the music, selling it to consumers.  These developments took an underground market and turned it into a multibillion dollar a year business. 

As can be seen, this grey market precedes legislation.  It is a place where mainstream society, and legislators, have never considered.  We see this in Airbnb, Uber, Grab, WeWork, Amazon, and so many more.  Before these companies, how many conceptualised a world we can order anything, and it would be delivered?  How many conceptualized riding in the personal vehicles of strangers, or staying in their homes all over the world?  Some of these companies worked, and many more will fail.  But the ones that work will be unicorns. 

Especially in the developing world, there is a vast informal market for everything from banking, to retail, to micro-industry.  These are opportunities, and whoever can come along and formalise it, they now have access to a blue ocean of hundreds of million, or more, potential consumers.  That makes it scalable, replicable, and workable.  This is where the next unicorn is born.

Quora Answer: Why Would an Insurer Cancel a Policy?

The following is my answer to a Quora question: “Why would an insurance company cancel a policy?” 

Policies lapse when premiums are not paid.  Coverage ends when the period of coverage is over.  For a policy to be cancelled, however, normally means that the insurer discovers a material fact that would have affected underwriting when the application for coverage was made.  If the omission was due to a mistake, the policy is simply cancelled, and new coverage must be applied for.  If the omission was deliberate, there are likely to be legal consequences.  Examples of omission of material facts include falsified data, non-declaration of medical conditions, and discrepancies in the contract. 

Another reason why a policy may be cancelled, especially for investment plans, is when the company considers the transaction suspicious.  This includes a pattern of churning, constant top-up and partial withdrawals without a sound financial reason, or a beneficial ownership arrangement that is suspicious.  This pertains to money laundering, and the insurer is obliged to make a report to the authorities.

Quora Answer: What Insurance is Good for a Wealthy Person?

The following is my answer to a Quora question: “What insurance is good for a wealthy person?” 

Insurance is a means to mitigate loss by engaging a third party to guarantee an amount to compensate in the event of specified loss.  Logically, it then follows that the more assets someone has, the more expensive those assets, the greater the need for compensation in the event of loss.  The wealthier someone is, it logically follows that the more insurance they need. 

They need to be compensated in the event that they are unable to earn an income due to death, disability or illness, of in the event that they are precluded from partaking in their profession.  If they own a business or any revenue-generating entity, they require compensation in the event of loss due to force majeure, litigation, accident, fraud, and dozens of other things.  For a wealthy person, all insurance is good for them, and the more they can get, the better.

Quora Answer: What Does a Startup Need to Show to Get Funding?

The following is my answer to a Quora question: “What sort of proof does a startup need to show that it can be successful before it gets venture funding?” 

Some people say you need a product, or a certain number of customers, or a workshop, or a patent, or whatever.  Actually, all you need is a good pitch, to the right investor.  There are investors who look for a great idea, and want to come in as early as possible.  If you can put together a pitch deck, and a core team, that is all you need for them. 

It then comes down to the actual pitch presentation.  You are asking for money, so make sure you practice your pitch with your team.  You need to put forward a compelling argument why you need that specific amount, what is the projected return, and what you are offering the investors in return.  Most people forget to put in the “What is in it for me” portion.  If you can do that, you get your seed funding.

Quora Answer: Is It Possible to Have Too Many Investors for the Funding Round?

The following is my answer to a Quora question: “What is a good or ideal number of investors for a startup?  Is there such a thing as too many investors in a round?” 

You can have as many investors as you can get, as long as you know how to manage the capitalisation table, and have space for the next round of fundraising, if required.  You could have one investor, and it may be a problem.  For example, imagine a startup that has just begun.  It is based on an idea, and there is no product.  Because the founder is from a wealthy family, his father gives him $1 million for 1% equity.  On the surface, that looks good.  The problem now is that the company is now valued at $100 million. 

Along the way, the founder and his team develop a prototype.  They require further funding, and they cannot go back to his family.  How is an external investor going to step in with the valuation based on the pre-seed funding?  If that investor puts in $10 million, does it mean he gets at most 10%?  He is not going to accept that, and even if all parties are agreeable, you will have a problem when you decide to list, or someone decides to exit or partial exit.  Cleaning it up is onerous and expensive. 

There is no rule of thumb that states the upper limit of investors you can have for each round of funding.  It is not the number of investors that is an issue, but the value of the equity stake.  That value has to be considered for each subsequent round of funding in advance.  If you can manage that, you could have a hundred investors.  You simply consolidate smaller investors into investment vehicles.

Quora Answer: Should Eloquence be a Yardstick for Competence?

The following is my answer to a Quora question: “Should eloquent speech or fluency in any way be a yardstick for competence?” 

Being eloquent is an indication of competence in the arts of communication and rhetoric.  It is not an indication of competence in other spheres.  You judge competence in specific spheres according to the markers of those skills, not eloquence. 

Being fluent in a language indicates competence in utilising it to communicate, adherence to grammar, and possession of sufficient vocabulary.  Fluency in language is not mastery of it.  Fluency in one language is not an indicator of fluency in another language, let alone being a gauge of competency in skills that do not require that fluency.

Quora Answer: Should I Ask My Clients to Invest in My Startup?

The following is my answer to a Quora question: “Should I ask my clients to invest in my startup?” 

It is not ideal to cannibalise your client base to fund your startup.  If they are both the funder and source of revenue, would it be in their interest for you to have a healthy margin for your goods and services?  It would make more sense for them to keep margins low to help their bottomline, and when you eventually fail, they will buy you up cheaply, and secure their position further up the supply chain. 

Your clients are your clients.  They are your source of revenue.  They want to keep costs of suppliers down, not enrich them.  Funders should be people who have money but are not interested parties with goals fundamentally contrary to yours.  It should be the sole interest of funders that you succeed so that they get a healthy return on their investment upon exit.

Quora Answer: What Happens if a Startup Fails to Reach Valuation?

The following is my answer to a Quora question: “What happens if a startup fails to reach the valuation that its investors value it at?” 

That depends on when this occurred, and the context of the fundraising.  The value of a company is dependent on its assets and what people are willing to pay for an equity stake.  Often, this is dictated by market sentiment more than the books of the company.  There will be times when a startup does not achieve its targets during a round of fundraising.  This can be due to events in the market, political and currency risk, management issues, or simply a bad pitch. 

If it is due to events in the market, the market is cyclical, and if it is an option, the startup simply waits out the cycle, and go back again.  It is the same with political risk and currency exposure.  The former is mitigated, and the latter is hedged against.  If it is management issues, then investors and shareholders will likely pressure the management to adjust the lineup.  This could include hiring an experienced chief executive, for example, or bringing in expertise to the board.  If it is a bad pitch, then amend it and go back into the fray. 

If, after all this, that next round of fundraising fails to achieve its targets, then the conversation becomes serious.  Investors may seek to fold the startup into another, consider a total buyout and put their own team in place, or simply exit.  If they exit, there are likely agreements in place where the various tiers of investors take their share first.  Whoever is left bears the brunt of that loss of equity value.

Quora Answer: What is the Biggest Threat to a Startup Other Than Insufficient Funding?

The following is my answer to a Quora question: “What is the biggest threat to a startup other than not getting enough funding? 

The biggest threat to the success of a startup is the people.  Most startups fail even before they start to ask for funding because the team falls apart.  Many more fail after they have one round of successful funding because large amounts of money change people, and often, not for the better 

Building a startup begins with the gem of an idea.  The next step is putting the team together, and forging a common vision.  Part of that includes articulating the values of the team, and how they see the company.  It is common values and shared vision which contributes most to success.  After that comes the hard work of putting together a pitch and meeting dozens, even hundreds of people, in the search for funding.  Even then, at regular intervals, the team must get together, and examine themselves, and their adherence to their core values.

Quora Answer: What Makes Someone Eloquent?

The following is my answer to a Quora question: “What makes someone eloquent?” 

Eloquence is the ability to express points clearly, concisely, fluently, in expressive rhetoric.  There are three elements to eloquence.  The first of which is mastery of the medium.  This is mastery of the language in all its nuances.  A lack of command of grammar, a limited vocabulary, and a diminished mastery of morphology in language is the foundation of this.  Also included in this is knowledge of the subject matter. 

The second is mastery of the arts of rhetoric.  This pertains to the use of rhetorical devices, an understanding of stanzas in sentences, an embrace of pauses, minimising filler words, and utilising just enough words.  A good speech is essentially spoken word poetry. 

Finally, the third s mastery of the stage.  This pertains to knowing how to use the stage for narrative pacing, knowing the audience so you understand how to broach the subject matter in the most efficient manner possible, and most of all, knowing yourself, so you can present yourself as the most credible elocutor of the position.

Quora Answer: Why Does the World Bend Over for China?

The following is my answer to a Quora question: “Why does the world bend over for China?” 

The world does not bend over for China.  China is the 2^nd largest economy in the world.  That makes China very influential.  However, we are living in a multipolar world, and China does not have everything her own way.  China has territorial disputes with almost every country it borders.  China has a trade dispute with the US and Europe.  China is facing pushback on its One Belt, One Road initiative in Africa and Asia.  Based on all this, and more, precisely how does the world “bend over” for China?

Quora Answer: What Would Happen to a Fortune 500 Company if Its Majority Shareholder Donated His Wealth?

The following is my answer to a Quora question: “What would happen to a Fortune 500 company if its majority shareholder suddenly donated all his wealth to charity?” 

There are two kinds of companies in the Fortune 500.  Some of them are publicly traded, and some of them are private.  For the public companies, no single shareholder has such a large holding that shedding ownership of shares would seriously impact their valuation.  After all, they are donating the shares to charity, not shedding them in anticipation of inclement financial news.  There is no change in the management team, and the charity would not likely rock the boat, and just take the dividends. 

If it is a private company, it may be possible that one single shareholder owns an overwhelming majority of shares.  However, unless there is a change in the management team, this is not going to have a significant impact on their revenue.  There may be agreements in place where the remaining shareholders have right of first refusal before the largest shareholder can dispose of those shares.

Quora Answer: Does a Business Have to Solve a Global Issue or Change the World?

The following is my answer to a Quora question: “Does a business have to solve a global issue or change the world?” 

The primary aim of any business is to be a going concern.  It has to make money.  It makes money by providing goods or services that address a need.  In the course of addressing a need, through market positioning and marketing, a company shapes consumer behaviour.  If the customer base is large enough, that has a profound impact on the world.  In an age of activist consumerism, companies shape their customers as much as customers shape these companies.  That is this change in the world, positive or negative. 

Addressing global issues can only be done my creating a company culture that is cognisant of these issues, and shapes business policy, strategic decisions, and marketing campaigns that serve to educate the client base on these issues, and where the company stands on it.  It is a luxury afforded to companies that are able to generate significant revenue.

Quora Answer: Was Lee Kuan Yew Right in Opposing Singlish?

The following is my answer to a Quora question: “Was Lee Kuan Yew right in opposing Singlish up until his death?” 

Yes.  Singlish is a bastardised, diminished form of English, a pidgin for the semi-educated and those who have not mastered the basics of English.  There is nothing inherently wrong when a language borrows words, terms, and even idioms from other languages.  This happens all the time.  The problem with Singlish is that it is local excuse for poor grammar. 

Singlish is the language of the lower socioeconomic classes.  It is not the language of international business, of academia, of the serious business of governance and policy making.  It is an affection of the masses to justify some section of the population’s inability to gain some competency over English.  If we had allowed it to flourish unchecked, it would have seriously impacted Singaporean’s ability to communicate with the wider world.  It would have impacted our standing as an international finance centre, a trade hub, as well as our attractiveness for foreign direct investment in our earlier days. 

As a Singaporean, I have an extreme distaste for Singlish.  It is a national shame.  I never deign to use it.

Quora Answer: Do You Need a CPA or CFA to Get into Venture Capital?

The following is my answer to a Quora question: “Do you need a CPA or CFA to get into venture capital?” 

You do not need to be a certified public accountant, or a chartered financial analyst to go into venture capital.  Those are the qualifications of people who are hired by venture capitalists, not necessarily the ones who run it.  It is good to have some background and qualifications, but what is more important is to have the network, the ability to think quickly, and an analytical mind.  Passing examinations will not give you that.